Emerging Markets Are Not All Created Equal

For most investors, targeting foreign countries where there are high expectations for growth is a useful strategy.

After all, in the United States, Canada, and Europe, economies are mostly growing at about 2% or less per year. And while these developed markets are less risky to invest in, finding value can be tricky.

That’s why for many decades, investors have been allured by the fast growth of far-off economies. In the 1950s and 1960s, Japan’s economy regularly expanded at a 10%+ clip, and who can forget the “Four Asian Tigers” that followed in Japan’s footsteps? In the 2000s, the focus shifted to the BRICS (Brazil, Russia, India, China, South Africa) – and more recently, attention has been on countries like Indonesia, Nigeria, Colombia, and Turkey.

Different Risks in Emerging Markets

Although emerging markets are similar in that they have high expectations for growth, it’s important to remember that these countries have very unique and different sets of risks.

Today’s visualization comes to us from Charles Schwab, and it provides a simple breakdown of the types of risks faced by the economies of emerging markets:

As an example, Mexico and Chile have considerably different risks, according to the chart.

Aside from currency risk, which they both share, Chile is particularly prone to sensitivity in the world’s commodity markets. That makes sense, because Chile is the world’s largest supplier of copper – and close to 50% of the country’s exports are copper-related, including refined copper (22.6%), copper ore (20.9%), raw copper (3.6%), and copper wire (0.5%).

On the other hand, Mexico is noted as having particular sensitivity to what happens in developed markets such as the United States. This is because 81% of Mexican exports go to the U.S., while the next biggest buyer of Mexican goods is Canada at 3% of exports. If the buying power of the U.S. and Canada is affected, it could have big consequences on what will be bought from Mexico.